MUMBAI: With the second quarter earnings season beginning this week, brokerages expect lenders to report a poor set of numbers as they see net incomes falling by 7-8% on the back of crimped net interest margins and a poor show by their treasury desks. But state-run banks are expected to do better overall on the margins front given their larger franchise which offer them easier access to the low-cost Casa deposits.
Private sector lenders like HDFC Bank, ICICI Bank, Axis Bank and Yes Bank among others will announce their September quarter earnings through the course of this week, most of them on Saturday, while their public sector counterparts will do so from the next week or in November.
Banks have been facing margin pressure since the beginning of this fiscal as the RBI has cut the benchmark lending rate by 100 bps to 5.5% between February and June. This has forced them to pass on the benefits to existing customers as most of the loans are on the repo-linked floating rates, while deposits are priced much higher as banks were facing a flight of cheap money out of their counter for some years now. While the repo-linked loans have to be repriced within a month under the external benchmark linked loan pricing, existing fixed deposits cannot be repriced, therefore banks will have to pay the agreed interest through the life of the deposits, impacting margins or cost of funds.
However, brokerages like Emkay Global, Motilal Oswal, Axis Securities and Yes Securities expect private lenders like HDFC Bank, ICICI Bank, and RBL Bank to be outliers along with public sector lender Indian Bank, while Axis Bank, Federal Bank, Bandhan Bank, Canara Bank and Union Bank of India reporting a softer quarter due to weak margins and elevated credit costs.
In a note, Motilal Oswal said it expects a 7.3% decline in private banks' net income in the September quarter on an annualized basis and 6.7% sequentially and the pre-provisioning operating profit is likely to decline 2% on-year and a steep 18% on-quarter.
“Public sector banks on the other hand are likely to report 7.1% on-year decline in net income, and 1.9% on-quarter in the September quarter owing to a decline in margins and moderation in treasury gains, barring PNB,” Motilal Oswal said.
Several analysts expect margin compression to continue during the third quarter, as the full impact of the 100 bps rate cut by the Reserve Bank may take time till December to be absorbed, though the impact of 50 bps rate cut in the June policy on banks’ lending yields may be fully reflected this quarter, while the moderation in cost of funds will happen with a lag.
Axis Securities in a report cautioned investors to expect larger private banks to witness margin compression of 10 bps, while their mid-counterparts are expected to report a drop in the 10-15 bps range.
State-owned banks are expected to do better, contracting around 10 bps on-quarter. The pain will continue for small finance banks, with Equitas Small Finance Bank reporting sharper margin compression compared to AU Small Finance Bank, Axis Securities said.
Provisional numbers show state-owned lenders outpacing private banks in advances growth in the second quarter. State-owned banks’ advances grew 10.7-16.87% as against 6.5-16.67% for private sector lenders during the reporting quarter.
These brokerages expect public sector banks to deliver only about 11% credit growth this fiscal, just marginally ahead of the industry figure.
“We would watch out for management optimism on growth pick-up likely from H2, supported by GST-rate cuts driving consumption demand, further supported by income tax rate cut and pick-up in unsecured credit as headwinds ease gradually,” Axis Securities said.
On the lagging deposit accretion front, these brokerages say even though mobilising deposits remains a task, private banks have beaten state-owned lenders on this front. Private sector banks’ deposit growth were in the 7.1-15.1% range, higher than the 9.28-12.13% registered by state-owned lenders so far this fiscal.
Banks have been struggling with deposit mobilisation over the past few quarters, especially on the Casa front, due to unattractive interest rates compared to other financial products.
“We expect our coverage universe banks’ deposit growth to mirror credit growth and stand at around 11%,” Axis Securities said.
On the asset quality front, they say fresh slippages would remain elevated for banks, with IDFC First Bank, RBL Bank and Indusind Bank leading this front, due to their higher exposure to unsecured retail and microfinance, though lower than the already elevated levels in the first quarter, when all of them reported heavy losses, according to a note from Yes Securities.
In general, slippages have been moderate sequentially due to the economic slowdown but Q2 may be flattish to slightly higher this quarter, it said. Sequential evolution of provisions would be a function of not only slippages but also of recoveries and upgrades and pre-existing provision buffers.
“Unsecured retail stress shows early signs of easing, but challenges persist in cyclical sectors like auto and small business loans, with credit costs expected to normalise in 2H6,” Motilal Oswal said.
“Large private sector banks with more diversified and secured portfolios continue to fare better and therefore we expect stable asset quality trends for public sector banks, aided by controlled slippages and their robust provision coverage ratio,” Motilal Oswal concluded.
